BRF SA (BRFS) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. [OPERATOR INSTRUCTIONS]. I would now like to turn the conference over to Mr. Thomas Carston of Thomson Financial. Please go ahead.

Good afternoon, ladies and gentlemen, and welcome to Sadia’s conference call to discuss the third quarter 2004 results. I would like to mention that a slide presentation has also been made available on the company’s website at www.sadia.com under the Financial Reports section.

Before proceeding, let me also mention that forward-looking statements are being made under the Safe Harbor of the Private Securities Litigation Reform Act of 1995. Actual performance could differ materially from that anticipated in any forward-looking comments as the result of macro-economic conditions, market risks, and other factors.

With us today in Sao Paolo is Mr. Luiz Murat, the Chief Financial Officer of Sadia. First, Mr. Murat will comment on the company’s third quarter 2004 results, and then afterwards, he will be available for a question and answer session. It is now my pleasure to turn the call over to him. Mr. Murat, you may now begin.

Thank you very much for the opportunity. I’m going to make a very quick resume of the numbers, because you have all that already published and in our website, and then I’m going to be ready for questions, if you will.

Well, we are happy with Sadia’s growth, but we are not so happy with our final results, which always could be better. In fact, we thought that the third quarter was going to be better than it finally came true.

As you can during our presentation, gross margin was much smaller than we had forecasted, as a consequence of our higher costs, and it was impossible for us to pass along price increases in the market to compensate these price increases.

The biggest impact on costs were generated on packaging and plastic, and through communications and energy. Petroleum also played an important role while it’s our most important [indiscernible] of our logistics system.

Well, on chart number 2 you can see that, quarter-against-quarter our gross revenue was up 30%, quarter-against-quarter, following the same pattern the whole year. If you go to chart number 2, you’re going to see that we already reached BRL5.3b in sales, 28% more than the aggregate in the last nine months of last year. Again, we keep improving our exports. We have reached 50% of our sales on exports against 45% last year, and 18% on the year ‘98.

On chart number 4, please give a note, as I have mentioned before, that in the third quarter, gross margin was only 28.5% against 31% for the whole year, and against 33% for the third quarter of last year. As a consequence of a worse gross margin plus as a result of higher than expected expenses resulting from higher transport costs, EBIT was smaller this year than the previous one, quarter-against-quarter, about 21% less.

Nevertheless, on an aggregate amount for nine months, we have a 67% increase on EBIT from nine months this year against the previous one. The bottom-line -- net income was 4% higher this quarter against the previous one, and almost 7% year against year. That margin is about 6.9%, much less than the 8.3% that we had before.

This year, by the way, has been very volatile. We have been seeing dramatic changes on demand. The second quarter was very well impacted by higher demand on exports due to influenza and now, on the third quarter market, we have decelerated, and also the internal market is not progressing the way we thought it should.

In any case, if you see on bottom line, EBITDA on nine months is 50% higher than last year, and quarter-against-quarter, EBITDA was a smaller 20%. Net debt to equity was much better today, 27% than last year, 32%, and we need only half EBITDA to pay net debt against 0.9 on the year before.

On the next chart you’re going to see that you have information published in a very known newspaper in Brazil, DCI, that comments how impossible it was for us to pass along costs to customers. It’s very different to what happened in the Industry, Services, Finances and Trade, in the Agribusiness, where it was impossible for us to pass price increases along.

It’s the same thing on the next, readjustment of suppliers. We had received an increase from the industry suppliers and we were unable to pass on the same way on the Agribusiness system.

Let’s go straight to chart number 8. Again, you see that we are addressing the sale of further processed and poultry cuts. There is a very big demand for poultry cuts this year, mainly due to the influenza in the Asian region.

If you move to the next chart, you can have a glance of how important it is for us to make value added products. If you can sell grilled chicken for $800, why you can sell a chicken leg [indiscernible] for Japan for $2100, and sell breaded chicken breast at $3600, so it’s very important for a company that has a brand, both chicken and technology, to value add up its product as possible.

Well, as a consequence of what I’ve just said, we keep giving a lot of focus on processed products. As a consequence, if you move to chart number 11, you can see that we are already generating 81% of our sales in the domestic market then with processed foods. It’s very different than the situation in ‘98, when only 53% was of such products.

Let’s move to export market which is chart number 13. Over there, again, we see that the most important volume exported today is poultry cuts, 44%, against 48% back in ‘98. Also, check that we each time are exporting processed products, are something like 18% of sales this year, against only 5% back in ‘98.

On chart number 14, please note that we keep improving poultry cuts more than a lot of products, again as a result of the latest Asian flu crisis. On chart number 15, please note that the most important destination for Sadia remains Europe, with 29%, and this is growing as that for several years, changing from a situation when the most important market was the Middle East, back in ‘98.

If you move, please, to chart number 17, then you will see that quarter-against-quarter, and although the economic environment in Brazil was not favorable, we were able to grow 11% of our sales in the domestic market, with the biggest increase done in processed products.

On exports, although we are noticing a tough competition in Europe, mainly from producers on the Asian trend that cannot export raw chicken any more, they are exporting more value-added products, they are making out tough competition in the European territory, even though we were able to go 81% of our exports of processed products, quarter-against-quarter. Total quarter-against-quarter, we increased our exports 23%.

The next chart, 18, you are going to see that this increase on volumes increased also revenue, which is 30% higher quarter-against-quarter. The resume of both charts is seen in chart 19, again, an increase of 23% in volumes generated at 30% increase in revenues.

Please note that –- don’t arrive to conclusions that the domestic market, 11% increase generated a 21% revenue only for price increases, because that’s not true. The most important reason right now is a change on the product mix. We are selling more value added products in Brazil, and we are selling also more processed products in exports, and on exports we are exporting more, for example, bolognes and margarine, which have a much lower cost, a much lower price than the orders.

In the other side, we are selling more value added products in Brazil, so changing the product mix which is richer in Brazil and less rich, or poor, in our export destinations.

Let’s move straight to chart number 23, please, and you will see how prices behaved. We had an increase in price in the domestic market of around 7%, year against year, which is much less than the costs during the period. Again, for example, we had an increase in packaging of about 40%. We had an increase in energy of 25%. We had an increase in communications of 17%, and so on and so forth.

So the price increases that we were able to get in the processed products in the internal market, besides a better product mix were not enough to compensate the increase in costs. That’s the important reason why our gross margins were lower.

In the domestic market for poultry and pork, [average prices] keep going to the next chart, 24. On 24, as a result of a tough competition from the Asian producers, processed products in Europe prices were very weak, and also we had a major contribution of product mix, mainly exporting a larger volume of bologne and margarine, as I already said.

Poultry prices went up, as a result, still of the bird flu, and pork prices went very high in an adjustment of the market to supply and demand. After the drop of exports to Russia, as a result of the quarters, the market has started to resume production and after that what happened is that we have an unbalance of demand and supply. That’s why prices went up at this moment.

Now on chart number 25, please note that we remain the first one in all the segments that we operate, with a very impressive market share in frozen and refrigerated margarine.

Chart number 26 please. Although Sadia has been very innovative, we keep on launching a lot of products, more than one per week, 61 products on average per year, this year only until September we already launched 52 new products. We keep always very aggressive launching of products in the market.

What type of products are we launching? Please see the next chart. You can see that today we are selling fresh pasta that can be cooked in four minutes, risottos, TV dinners, sliced cheese, ice cream, sweet tarts, and meats ready to be cooked and already spiced, a 18 months aged ham, Parma, olive oil and products like that, all new. Also different cuts of frozen meats, of chicken and pork and beef also.

On chart number 30 please note that investments which were very slow during the last four years, around BRL120m, or roughly $40m, they are going up. If you go to chart number 32, you can see that we already invested BRL172m this year, and we will be investing in the year something like BRL220m, much more than forecasted, the BRL150m that we had forecasted at the beginning of the year.

Why we are doing that is because we are getting some bottlenecks out of our way. We also had invested in a major distribution center which is going to [operated] and now on the next 15. It’s an 11,000 square meters distribution center where all of our exports are going to be concentrated. We are going to be able to ship 2,000 tons of products per day, almost 100 carloads of products, for export. It’s a 27 below zero degree building with state of art handling.

Next is chart number 33. As a consequence of expansion of our sales and also expansion of demand on the Asian market that requires much more handmade cuts, we also hired something like 5,000 new employees from December to September, something like a 14% growth this year, reaching 39,000 employees in the company. We are among the 10 largest employers in Brazil.

On chart 34 please see that net income keeps moving up. Our third quarter, I guess third quarter is 4% higher, but if you move to chart number 35, you can see that in a year-to-year base, we are 7% higher, so bear in mind that we had in the year 2001 a fantastic year, never to forget, and that year we had generated BRL200m of profit. 2003 was another fantastic year, never to forget, BRL440m. On 9 months only, we had already generated BRL200m, so very likely we are going to have another record year in profit for our company.

Chart number 36 please, although the third quarter we had generated 20% less EBITDA than on the quarter on the last year, if you get an accrued base, year-against-year, we are 50% higher EBITDA this year than what we had generated last year. We already obtained more EBITDA on the 9 months than the whole year last year, so very likely, we are going to overpass BRL800m, maybe BRL900m of EBITDA, something like $300m of EBITDA this year alone.

Chart number 38 please. It’s an idea of the quarter-against-quarter. Please go straight to gross profit. You can see that gross profit is 28% against 33%, so we had an increase of only 8% in gross profit quarter-against-quarter. With the net operating revenue going up 25%, costs of goods sold went up 33%, and unfortunately, also sales expenses went up 41% again as a result of major increases in transport costs.

Here on the financial results and equity pick-up, please note that we had BRL26m of positive results -- so it’s a financial gain -- against BRL26m expense of the third quarter of ‘03. The reason of this BRL26m is that first, BRL22m was generated a reversion of a provision for tax on income, but that was a law that was changed, and so were able to get this money back. And BRL4m is a result of positive arbitrage and hedging of our exchange rate generation.

In any case, quarter-against-quarter, where our net income was 4% higher than last year. On a year base, please note the same thing, net operational revenue going up 24%, cost of goods sold 19% and gross profit 38%, year-against-year. Sales expenses were 31% as a result of freight again.

Note please financial results and equity pick-up was a negative this year, against positive last year. Don’t forget that in the first semester this year, we decided to change the way we were applying the results, the financial results of the company, where before we were buying Brady’s and Seabones (ph) and so on. Today, we don’t have that any more. So we realized a loss on the first semester which is [entered free] until today.

Important please. Note that income tax and social contribution that was only BRL46m of provision for last year. Now is BRL111m, so a 142% increase in this kind of provision. Why is that? Because a lot of the gains this year was not generated in our international operations overseas. Our operations overseas, they pay less income tax than here. That’s the reason why the income tax is higher this year than the previous one.

Well, on chart number 40, net financial debt is BRL475m. It’s BRL10m below the number of last year, and it’s also important to say we have a much less equity – net debt to equity, much less EBITDA to net debt.

41, the result of the value at risk which shows the risks in our assets, from a 36% risk on our equity in 2002, it was around 6% in September, so a major reduction of risk.

And net debt to equity, chart number 42, shows all the pattern, that a resume of that we are ready to be in our new investment phase. On net debt to EBITDA, chart number 43, the same pattern, very low, only half EBITDAs to pay debt.

Well, so that’s a resume of the numbers. Let me talk about the future now. We are forecasting that this Christmas is going to be better than the previous one. Very likely we are going to have a 5% to 10% increase in volumes this year against last year.

We are also forecasting that for the next twelve months, costs of feeding for our herd is going to be 5% lower than the numbers that we had in 2004. Grain production worldwide is very big, and so prices are going to be reduced, so that’s for the reason we are forecasting lower of our feeding costs.

Very likely we are going to maintaining our growth on exports. We are developing some more clients in new countries, and we will also increase volumes of further processed exports to old clients. The Asian flu is still there. There is no forecast when and if it’s going to end. For that reason, we will remain a big exporter to the Asian region, mainly for raw meat.

Very likely, we are going to have the maintenance of low prices for further processed poultry meat, again as a result of a lot of pressure from the Asian producers selling these products in the European market. We are also forecasting that Russia will reduce the restrictions for exports of Brazilian meat that are present today, and we are also forecasting that in the year 2005, very likely we are going to have a revision of the quota system in such country, giving back conditions for us to increase our exports [and that’s risen] very quickly.

In Brazil, the economic cycle that had started, it keeps moving, slower than we thought, but a good sign is that it’s positive. We are also aware that inflation is a threat. Our government is very aware of inflation and is looking for it very strongly. Interest rates have been growing and will be going up to avoid the growth of inflation.

Demand will keep growing at 3% to 5% next year. That’s our best forecast for the moment. Sadia is very happy also that in the last quarter, we are able to get some very interesting financial conditions from the market, with excelled demand over supply. We also were able to make changes on information systems in fewer days than we had expected before, and we are looking with positive eyes for the next quarter and for the next year.

Sadia is just entering into a new growing cycle. We are ready for it, and part of that is already starting. We have just made it public that we are going to be making a BRL250m investment for the year 2005, investing a lot in the bottleneck of our industries. In most of our industries we have a little bit of investment, and one of it, which is our [Bologna] site, we have a major investment to increase its production.

That’s about all. I am ready for answers please. Thank you.

Thank you, ladies and gentlemen. [OPERATOR INSTRUCTIONS]. Our first question comes from Victor Galono (ph) of HSBC. Please go ahead, sir.

Hi, Luiz, just one specific question. In terms of the export market, we saw that the pork volume sales were hit very hard on a year-on-year basis – sorry, on the accumulated basis, on the nine month basis. Can you expand on this? Would this have been, in particular, related to Europe and perhaps the entry of Poland into the EU?

The other point I wanted to raise, do you feel that there is any opportunity here to begin to pass through these higher costs in Q4, or is this something that remains difficult in the current environment?

Okay, thank you for both questions. First of all, the reduction on pork volume you see is resulting from quotas established in Russia. Quotas were established at the end of 2003, and still now we are struggling to get a new status on that.

For you to understand, on the first quarter this year, exports were almost half to Europe, but then it came back slowly in the second quarter, and it’s coming back again on the third, but not at the same pattern as last year, again, mainly as a result of quotas [established] by the Russians.

The only problem here is that the Russian society is pressing very much on the government to change the situation for the fact that the Europeans and US quotas are having not been used, so there is room for us to get, to replace this non-supply, and that’s something that we are working on at this moment. So we forecast better volumes, or volumes returning to Russia, and it’s not a problem of competition from locals or Europeans, no. It was only a political issue.

Don’t forget that the Russians also took the argument of having foot and mouth disease in one cow in the Northern Amazon area to ban all exports of meats to Russia. And you know there is absolutely no risk of any contamination from the Southern Brazil of such a foot and mouth cow in the Amazon area. So do the Russians, but they claim that reason to halve our exports. No doubt this is a political issue, and our government is already working on that, and we are very optimistic that this situation is going to be solved in the next weeks.

And on year 2005, we also expect that the quota system is going to be reviewed in a larger number for [other food] companies. So we are going to come back again with higher volumes on exports.

Okay.

Your second question was related to prices. You are correct. We were unable to get price increases in the third quarter, although we were hit by major costs. The good sign is that fourth quarter demand is much better, and we are already having the price increase that we needed. We are under discussion right now with the buyers, but we are already practicing new prices, for the only reason that we could not maintain the company not generating profit, or with the low profit as it was in the third quarter.

Also don’t forget that the fourth quarter, historically, is the best month for Sadia, due to the type of products that we are producing. We’re the leaders in the turkey and in the ham for the feasts of the year.

Yes. Okay, great, thank you.

You’re welcome.

Thank you for your question, Mr. Galono. Our next question comes from Margaret Calver (ph) of Harding Love New Management. Please go ahead, Ma’am.

Okay, thank you. Two questions also. The first one is how you see the net effect of these repeated incidences of avian flu. On the one hand, it looks like it’s really enhanced the prices of your whole poultry exports to Asia, but on the other hand, I was a little surprised to see the competitive pressure on the processed prices in Europe by the Asian companies exporting as much of processed as they could in response to being unable to export whole birds. How does that net out for you?

And then the second question is regarding consolidation in the market, given the recent acquisition of [Siara] and whether you have any acquisition plans that you could discuss?

Okay. First of all, Asian flu is still there, and unfortunately nobody can forecast if and when it’s going to end. The situation today is that in the Asian producers, already are taking measures as to keep making their revenues, so if they cannot sell raw meat, they’re converting all the raw production that they had before into cooked or roasted or whatever, as doing so they are able to export, and so today, Asia is a growing exporter of processed chicken, and we believe it’s going to remain like that.

Again, nobody can forecast if it will in any day end. By the other token, [ENA] fits a fantastic opportunity for us today because in fact, Brazil is the only big potential supplier of such products, raw products. For Asia, what is going to happen next? Well, we are trying not only to be a producer of raw but we are also starting to make negotiations with the same buyers selling the other products we have, just in case that if one day we also would have a problem with raw, we would have also the same opportunity to convert into further processed.

Looking into a crystal ball, what we can forecast today is that in the future the percentage of cooked bacons or meat is going to be growing at a much faster pace than the raw, on a only way, because that’s good to defend both parties, producers and buyers that nobody is going to be having a problem, not one for having a product without selling enough, and the other to buy without having the product. So that’s the scenario for the Asian flu, okay?

Okay.

The second question is related to consolidation. No doubt [Cargill] did the first move and there are a lot of players in Brazil today making their thoughts. It’s a logical thing that everybody analyzes what’s going to be the best scenario. We don’t have anything yet to be sad about it. The only thing is that we are looking with our eyes very open, talking and listening to everyone that has ideas. That’s the only thing I can say for the moment.

Okay, and if I could just tack on one, another question, could you discuss what the equity pick-up component is on the financial results?

Hold on a second. Yes, you’re relating to table 39 on the presentation. Well, what happens Margaret, the problem is not a problem. Sadia has a very interesting characteristic. We have a lot of our assets, financial assets, outside Brazil. They are international companies and the results of such companies must come and consolidate in our results not as a financial gain or loss, but as an equity pick-up.

I see.

So what had happened in the previous years is that every year for nine years, every quarter we were having positive equity pick-ups from positive financial gains in [and raises offshore] which were consolidating and coming as an equity pick-up, all right?

What happened is specific this year is that one year only, on the second quarter this year, our board members had decided that we needed to change the way we had our financial assets. So we realized all the assets that we had at that time with a loss, and we buy another position.

At that time, we had several financial assets which had a market volatility. Today, we don’t have such financial assets any more. We don’t carry any financial assets that can generate a loss in principle, okay?

Okay.

And as a consequence, on the second quarter, we generated a loss offshore. This loss shows in the result as equity pick-up and then a rising of the consolidated. Is that clear for you?

Yes, so it shows in the nine months because it was done in the second quarter, but it does not show on the third quarter?

Yes, that’s correct. That’s correct, but the loss was done in the second one. If you go there and look at the information on the second, you’re going to see that, and if you go to the first, it’s not there also. It was something that happened in the second quarter, but very unlikely is going to be happening in the future again or with this kind of size.

So you expect that the magnitude of this line item will remain small one way or the other, whether it’s positive or negative?

No, we don’t expect this line to be negative any more in the future, no way. We expect that in the future, equity pick-up is going to be always positive, and the reason for that is that equity pick-up is done into financial gains offshore. We are not going to have financial losses.

We are [praying] the company to have financial losses in the future first, and second, we are making trading there that generates profit. It’s very unlikely that it will sell, unlikely it sells with a loss, so the gains that they do also, are positive. So for the future equity pick-up, I’m knocking wood, it would always be in black ink.

Okay, thank you.

You’re welcome.

Thank you for your question, Miss Calver. [OPERATOR INSTRUCTIONS].

No more questions?

No, sir, not at this time.

Okay, I want to thank everyone for your patience and your attention. Please be aware that Sadia is always here for you. If you have any questions or suggestions, please call us or send an email. We are here to help you understanding our company. Thank you very much for your attention. Good afternoon. Bye.

That does conclude our Sadia third quarter results 2004 conference for today. Thank you very much for your participation. You may now disconnect.